Monday, 14 August 2017

Companies Commission should explain its stand

Although the criteria for audit exemptions have been finalised, the debate may go on

The STAR by Errol Oh

WHAT will change when potentially tens of thousands of small companies in Malaysia are no longer required by law to appoint auditors? Will these companies benefit from not having to bother with annual audits of their financial statements? Will others find it riskier if they have to rely on the companies’ unaudited accounts? And how will audit firms deal with the drop in revenue?

We are likely to start seeing the impact of the audit exemption in 2019. That is if the Companies Commission of Malaysia (CCM) sticks to the criteria set out in its Aug 4 practice directive for determining which private companies aren’t obliged to issue audited financial statements.

The matter may not be settled yet despite the robust four-month-long public consultation on the proposed practice directive.

A number of heavy hitters were among those who wrote in to oppose the exemption for small companies. The CCM has subsequently tweaked the criteria and explained further the rules – the practice directive expanded from a five-page draft to a final version that has eight pages – but there’s no indication that the critics have changed their minds.

The Malaysian Institute of Accountants (MIA), whose lobbying against the exemption was the most vigorous, says its council will meet later this month to discuss the CCM’s latest move. Meanwhile, the institute has solicited views from members.

Based on the MIA’s survey of audit firms and the feedback gathered by the CCM during the consultation period, it is clear that most practitioners don’t support audit exemption for small companies.

The chief arguments are that the financial statements of many SMEs won’t be reliable if not audited; the companies will have trouble with their tax filings and loan applications if they don’t have audited accounts; and the loss of audit jobs will hurt small and medium accounting firms and reduce training opportunities for accounting graduates and students.

By the time the consultation ended on Feb 28 this year, about 100 individuals, firms and organisations had given comments, with an overwhelming majority saying they didn’t agree with the move to exempt small companies.

(The draft practice directive also talked about audit exemption for dormant companies, which was widely accepted and is included in the Aug 4 directive.)

According to the MIA, the other membership-based organisations that offered their opinions were the Malaysian Institute of Certified Public Accountants, Malaysian Institute of Chartered Secretaries and Administrators, Malaysia Accounting Firms Association, Association of Banks in Malaysia, and Malaysian Association of Company Secretaries.

The banks and other financiers say they have an issue with the audit exemption because they depend on audited financial statements when assessing applications for loans, and monitoring the performance of corporate customers.

Surprisingly, government agency SME Corp Malaysia is less than enthusiastic about the audit exemption. A newspaper report last month quoted the agency’s CEO as saying the exemption must be treated cautiously as there are a few possible drawbacks to SMEs.

One of the more strident pro-exemption voices is that of Nik Mohd Hasyudeen Yusoff, a former MIA president and the founding executive chairman of the Audit Oversight Board.

When responding to the draft practice directive, he said the audit exemption would enable small companies to manage their costs. He added that instead of paying audit fees, the SMEs could use the money to hire accountants to help prepare financial statements in compliance with the accounting standards.

He argued that auditors should not have a part in the preparation of the clients’ accounts because it compromised the auditors’ independence.

“An audit performed without compliance with independence standards are of no value,” said Nik Hasyudeen, who gave comments in his capacity as founder of Inovastra Capital Sdn Bhd, which advises on leadership, governance and strategy.

Incidentally, in their comments to the CCM during the consultation, some of the other respondents suggested that many SMEs couldn’t issue financial statements without the auditors’ intervention.

Nik Hasyudeen even recommended that the criteria for audit exemption be changed so that more companies would qualify.

In the draft practice directive, the CCM said that for a company to be exempted from appointing an auditor, its must fulfil two of these three conditions: annual revenue of not more than RM300,000; total assets below RM500,000; and not more than five employees.

Nik Hasyudeen said the revenue cap should be increased to RM500,000, in line with threshold for exemption from the goods and services tax system.

The CCM did the opposite; it narrowed the scope for exemption. In the Aug 4 practice directive, the revenue and assets criteria for exemption have been lowered to RM100,000 and RM300,000.

In a Facebook post, a disappointed Nik Hasyudeen said the new criteria “practically require most active companies to be audited”. Is he right about that?

According to the Statistics Department’s Economic Census 2016, Malaysia had about 694,000 microenterprises, which are defined as having sales turnover of less than RM300,000 or fewer than five employees.

Going by CCM figures, perhaps 15% of these business are companies, which gives us 104,100 companies with annual revenue of less than RM300,000. If we assume that half of these have sales that don’t exceed RM100,000, it appears that about 50,000 companies will qualify for audit exemption.

That’s a small figure when compared with the 1,226,273 companies registered with the CCM as of July. However, the naysayers point out that it will be easy for the commission to later push up the thresholds. That’s presumably why the MIA is not exactly jumping with joy despite the lower thresholds.

But what’s particularly striking about this conversation over audit exemption is the CCM’s silence on the basis for the criteria and the importance of the exemption.

The change in legislation that brought about the exemption came from the Corporate Law Reform Committee. But the committee’s final report was issued way back in 2008. Much has changed since then.

On its website, the CCM bills itself as the “leading authority for the improvement of corporate governance” and says it ensures compliance with business registration and corporate legislation through “comprehensive enforcement and monitoring activities”.

Surely that should include supplying an authoritative and convincing rationale for audit exemption.

Executive editor Errol Oh is glad to see the strong response during the public consultation on the draft practice directive.